Yes, gold is at a record high...against the dollar. Just what does that mean?
On Tuesday, a NYT column pointed out that gold is only at a record high if you don't adjust for inflation. Just what are gold – and the dollar – worth?
David Leonhardt has an odd article in the New York Times where he criticizes those of us pointing to how gold has reaced a new all time high:
"Gold is at a record only if you fail to adjust for inflation. And you should almost always adjust for inflation. Otherwise, you end up with meaningless records — Gold reaches record high! Oil reaches record high! Lettuce reaches record high! — that depend on the fact that a dollar in 2010 does not have the same value as a dollar did in, say, 1980.
More than a month ago, Ryan Chittum of The Columbia Journalism Review noticed the epidemic of supposed gold records and urged those of us in the news media to stop. The actual record was set 30 years ago, when the price of gold, in today’s dollars, hit $2,387, or 71 percent higher than it closed on Tuesday.
This isn’t simply a question of math. Anyone who says gold is at a record high (or who said oil was several years ago) is getting the story wrong. Why? Because $10 today is not more valuable than $9 a few decades ago. Claiming otherwise is tantamount to saying that 10 rupees is more valuable than $9 because 10 is a bigger number than 9.
The notion that gold is more expensive than ever happens to fit with a larger narrative that also does not square with the facts — namely, that inflation is an imminent threat. This can be a bit confusing, I realize, because inflation plays two roles in the story: past inflation distorts our view of record highs, while future inflation is the concern of some of those people making a big deal out of gold. "
Note his strategy to confuse. The point is that gold is at a record high against the U.S. dollar. No one has ever talked about record highs against lettuce or a basket of consumer goods. The point is that the Fed has, and continues to debase the dollar.
And his argument becomes even more absurd if you consider that he lashes out against the notion of considering past inflation. Yet as he acknowledges later in the article, the entire decline in the inflation-adjusted gold price since the brief 1980 peak happened in the 19 years that followed. For the last 11 years, including the latesty year, gold has soared regardless of whether you adjust it against the CPI or not.
What gold's drop in particularly real but also nominal terms between 1980 and 1999 reflected was decreased inflationary expectations. It's rise since then reflects primarily higher inflationary expectations but also actual inflation and lower interest rates. And this is the story that Leonhardt in a very unsuccessful way tries to refute.
He later attributes gold's rise to increased industrial demand from China and other emerging economies. But that is hardly applicable to gold which has almost no industrial use.
That an article of such a poor quality could get published at a leading newspaper is disheartening. But then again, I guess this is what you should expect from the newspaper that hires Paul Krugman as a columnist.
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